Iran sanctions won’t change the oil game

There goes another “chunk of the world’s crude supply”, says The Wall Street Journal. The Trump administration’s decision to reinstate sanctions on Iran, the world’s fifth-biggest producer, has given oil prices another boost. Brent futures have eclipsed $78 a barrel, the highest price since late 2014. Prices have risen by 50% since the summer of 2017, and by almost a fifth since the beginning of this year.

Iranian oil exports reached around 2.7 million barrels per day (mbpd) in April, or almost 3% of global demand. In 2015, when sanctions were lifted, Iran was producing just 1.5mbpd. The news comes at a time when global demand has been rising and a pact to curtail supplies between oil exporters’ cartel Opec and Russia has helped mop up much of the global glut.

Making up the shortfall

Donald Trump’s decision to reinstate sanctions on Iran, the world’s fifth-biggest oil producer, has given oil prices another boost, but Oil bulls shouldn’t get too confident. says Spencer Jakab in The Wall Street Journal. We don’t know how the politics of this move will play out. Europe could potentially water down the US position, or Trump could opt for only a partial reimposition of the sanctions. Even if he takes the “harshest possible position, the rally still may be overdone”.

Quite so, says Anatole Kaletsky in a Gavekal Research note. “It is far from clear whether Iran’s oil exports will be reduced sufficiently to affect the global supply and demand balance.” Even very bullish analysts don’t think the sanctions will reduce Iranian exports by more than 500,000bpd. Most of Iran’s oil is sold to China, India and Turkey, “all of which are likely to ignore or circumvent any US sanctions”. Approximately 850,000bpd go to the EU, South Korea and Japan collectively. If these sales are blocked, the oil will be diverted elsewhere.

Shale output ready to soar

Other factors will have a greater bearing on prices than Iran’s half-million bpd. For example, Venezuela’s crude output could fall by a further 500,000 bpd owing to US sanctions, following a slump of a similar size due to the economy’s implosion.

Bears will look to the likely decline in global demand from oil’s $30 a barrel price increase over the past year. “Soaring gasoline prices have already reversed half the gains for middle-class Americans from this year’s tax cuts.” Meanwhile, US shale producers, having become increasingly efficient in the past several years, are cashing in on the rise in prices.

The US Energy and Information Administration has continually raised its output forecasts over the past few months. Shale production is on track to hit a record 7.18mbpd, while “you have the threat that a high enough price will start to activate” another 7,7000 drilled but uncompleted wells, Walter Zimmerman of analysts ICAP TA told Reuters. US production has climbed by 12% since the start of the year. The upshot? The usual factors – Opec, global demand and shale – will continue to set the oil price. Iran, concludes Kaletsky, “is hardly a game changer”.